Compliance with newly enacted security rules and regulations in the financial services industry has placed additional burdens on broker-dealers to conduct client identity screening for both new and existing clients. With the recent promulgation of the USA Patriot Act, for example, broker-dealers are now required to develop a Customer Identification Program (CIP) that implements reasonable procedures (1) to collect identifying information about their customers upon opening an account; (2) to verify their customer's identity; (3) to maintain records of the information used to verify the customer's identity; and (4) to determine whether the customer appears on any list of suspected terrorists or terrorist organizations. Financial institutions that are required to comply with such rules include, for example, securities brokers and dealers, banks and trust companies, currency exchanges, insurance companies, savings associations, credit unions, mutual fund companies, futures commission merchants, futures introducing brokers, as well as other organizations operating in the financial services industry. In some cases, organizations outside of the financial services industry may also be obligated to comply with these rules and regulations.
As a part of their Customer Identification Program obligations to collect and verify customer information, many financial institutions are required to develop procedures to collect relevant identifying information regarding each customer's name, address, date of birth, and taxpayer identification number such as Social Security Number or government-issued passport number. Verification of the customer's identifying information typically occurs with traditional documentation such as a driver's license or passport, although other alternative methods may be implemented provided the documentation meets certain threshold requirements.
In addition to collecting and verifying customer information, financial institutions must also implement procedures to check their customers against lists of suspected terrorists or terrorist organizations maintained by the government. To fulfill this obligation, some financial institutions elect to partner with a third-party vendor that specializes in performing client identity verification. An example of such CIP vendor can include RemitPro, LLC of Omaha, Nebr., which provides a client validation software module under the trade name RISKALERT. Access to the CIP vendor's verification program is typically accomplished by a direct connection or via an Internet portal, and generally involves the transmission of client identifying information to the vendor for cross-checking the customer against multiple databases. Once checked against these databases, a message indicating whether the verification passed, failed, or requires further review is then provided back to the requesting party. In some cases, additional information about the customer may be sent back to the requesting party in the event the verification request was unsuccessful, or if the customer's name appears on a watch list of suspicious individuals or organizations.
More automated systems for client identity screening are becoming increasingly necessary in the financial services industry as a result of the additional requirements placed on compliance managers and other corporate officials responsible for compliance with Customer Identification Programs. With respect to some broker-dealers, for example, compliance with the Customer Identification Program is typically accomplished by the same compliance manger or officer responsible for overseeing compliance with other securities provisions such as trade confirmations, suitability provisions, etc., placing additional burdens on these individuals to ensure full compliance.
Although many financial institutions are able to offload some of their identification and verification obligations to CIP vendors, the costs associated with such offloading can be significant. Existing software programs used by financial institutions to ensure CIP compliance is often conducted on a per account basis, and do not provide a mechanism for filtering existing clients that have already been screened for compliance and/or who have certain accounts that may be exempted from compliance. In some cases, the software program employed may not provide the ability to specify more detailed information about the customer, or may not associate together multiple accounts held by a single customer. Because many CIP vendors charge on a per item basis each time a verification request is performed, the practice of duplicating client identifying information used by many institutions often results in an increase in the total cost of compliance. In addition, the practice of submitting duplicative entries for verification often increases the storage space required to maintain records of the information used to verify the customer's identity, further adding to the total cost of compliance
Accordingly, there is a need for automated solutions for performing client identity screening in the financial services industry in order to more efficiently meet security rules and regulations.